Understanding Hire Purchase: Pros and Cons for Your Business

Hire purchase is a popular method of financing goods such as cars, motorcycles, and expensive vehicular assets.

Through this method, buyers get to obtain ownership of the item over time by paying off periodic, fixed installments.

Once the buyer has settled the full cost of the item, they can immediately take ownership and enjoy unrestricted use of the item.

This holds true whether they shift terms and pay in advance or pay as stated in the agreement with the lender.

The hire purchase scheme is a highly popular one, but it’s not without its own set of disadvantages.

Let’s go through some of the pros and cons of undergoing a hire purchase agreement for your business.

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Pros of Hire Purchase Agreements

Here are some of the advantages of getting into a hire purchase agreement.

1. Flexible Payments

Hire purchase agreements are typically more flexible than other financing options.

You don’t need to pay the full price upfront; instead, you can agree on a payment schedule that fits your budget and cash flow.

This allows you to purchase the asset now and enjoy its purpose while granting you the flexibility to cover the cost of it over a longer time.

On top of that, if you manage to get more money in the future, you can always prepay your balance and settle it faster to decrease your interest rate, and consequently, lessen the cost.

2. Eventual Ownership

One of the main advantages of hire purchase agreements is that you will eventually become the full owner of the asset.

As soon as you pay off the total cost, you can claim its ownership and enjoy the full benefits that it brings.

This is not like the case of, say, leasing a car where you don’t have the option to own it once the lease period ends.

For companies or individuals who intend to use the asset over a long-term period, opting for a hire purchase is an ideal option to ensure that you get to keep the asset eventually.

If you would like to learn more, see this article: ‘Car Lease vs Hire Purchase: What’s the Difference’ from Westpac.

3. Fixed Interest Rates

When you enter into a hire purchase agreement, its interest rate is typically fixed throughout the loan period.

This can range anywhere from 4-8%, depending on the down payment you’ve given and the agreement terms you’ve settled with your dealer.

This means that, once you make your initial down payment, your monthly repayments will be the same until the full cost of the asset has been covered.

The fixed monthly payments can be especially useful if your business is budgeting and doesn’t want its outgoing cash flow to undergo fluctuating variations.

You also don’t have to worry about economic downturns adversely impacting your loan rates through a hire purchase scheme.

4. Enjoy The Asset Now

Lastly, and perhaps most importantly, the perk of hire purchasing is the immediate access you obtain from buying the asset.

If your business is currently struggling to come up with the funds to purchase an item, then a hire purchase can be a viable option as you’ll still get to enjoy the benefits of having it immediately.

This grants your business the ability to start its operations without being hindered by insufficient equipment.

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Cons of Hire Purchase Agreements

Despite all the benefits, opting for a hire purchase agreement isn’t always the best solution. Here are some potential downsides to it.

1. Initial Down Payment

In most hire purchase agreements, you will still need to pay a certain percentage of the purchase price before you can benefit from the scheme.

This initial down payment is often set at 20-30% of the total asset cost.

This means that you’ll have to come up with a chunk of money beforehand to make use of a hire purchase agreement.

For companies or individuals who are currently spread thin for funds, this can be a major setback.

But if the asset is necessary and you believe the benefits of a hire purchase outweigh the initial down payment, then it might be a risk worth taking.

2. Late Payments Affect Your Credit Score

Falling behind on payments can have dire consequences.

Not only will your dealer potentially repossess the asset and impose a ton of dues, but it might also affect your credit score.

This is especially true if you are operating your business under a limited company, as the hire purchase agreement will be tied to your company’s credit record.

To avoid this, make sure that you have a projected income plan set before considering a hire purchase.

This way, you’ll have a game plan on how to accumulate funds and ensure that you don’t pay late.

3. Uninsured And Seizable 

Under a hire purchase agreement, the asset you’ve purchased is still treated as an asset of the dealer.

So, in case your business becomes bankrupt, the asset will not be protected by a standard insurance plan (optional insurance — gap insurance —would be needed).

This means that the asset will be sold off or seized by the owner to cover any outstanding debts or liabilities you are due.

4. Long Period of Payment

A hire purchase agreement is structured so that payments are done on a monthly basis until the entirety of your asset cost has been covered.

This can range anywhere from 5 to 10 years, depending on the agreement terms you’ve settled with your dealer.

While this is a viable solution for some businesses, it’s important to note that other businesses may not have the luxury of waiting that long.

As such, be sure to consider your company’s needs and view the loan terms objectively before signing any contract.

A disadvantage of Hire purchase agreements are the long durations of payment

Hire Purchase: Is It Worth It?

Hire purchasing can be an excellent way to jumpstart your business operations immediately without having to pay for everything upfront.

However, the best way to know its true value is by evaluating your business needs meticulously.

If you currently have the cash on hand to pay a larger downpayment or even the full purchase price, for instance, then a better financial decision may be to simply pay for the asset upfront.

If you don’t, or would rather pay smaller fees over a period, then a hire purchase agreement can be a great way to access the funds quickly and to get the asset you need without having to save up for too long.

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Last Updated on 2nd February 2023 by Emma

About Emma

I'm here to help you become confident in making the best money decisions for you and your family. Frugal living has changed my life, let me help you change yours.

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